Published: Dec 31, 2021, 9:00am
There is no set definition of what a startup is. It generally is a company that looks to make an innovative product or extend a service in order to make a dent on the status quo and thus solve a major problem in the process. For example – Uber made an app to connect the riders and the cab drivers, a concept that disrupted the everyday way of hailing a cab. This efficiently solved the problem of both the stakeholders in an innovative manner.
What differentiates a normal or traditional company from a startup is however not the actual product or service (although it may) but the way they both operate. A traditional business scales at a very linear rate through organic growth tactics and is generally profitable from day one. However, a startup grows at a very fast rate through the help of huge amounts of capital and resources and thus may not even be profitable till a couple of years into operation. The focus for both types of business are very divergent and that is basically what differentiates a startup from all the other types of companies that exist out there.
For example – Facebook became one of the largest companies in the world in a matter of a decade, but there are businesses that have existed for two to three decades and haven’t achieved the scale of Facebook till now.
It is obvious not all startups become huge and it primarily depends on the idea that is being implemented but the same idea can be implemented with a traditional business mindset or a startup mindset.
As explained in the previous section, startups are companies that operate with a hyper-growth mindset. They obviously need huge amounts of capital and resources to achieve the same which in most cases has to come from external sources. External sources means the capital which is used in running a business is not just the personal capital of the founders or directors of the business but people and firms external to the business.
These people and firms believe in the business and thus give money and other ancillary resources to help the founders make the startup a success. In return they are given ownership of the company (stocks) and/or interest on the amount extended (in case of loans). These serve as incentives for people to invest in the business.
A startup raises multiple rounds of capital from different sources and for diverse purposes during its lifetime. Broadly the kinds of capital can be divided into equity and debt capital.
A startup ideally repays all its equity investors when it gets acquired by another company or goes for an Initial Public Offering (IPO) in the stock market. Events like these are called “exits” in the startup ecosystem.
A debt investment on the other hand has its own repayment timeline and is generally not dependent on the happening of an “exit”.
A retail investor can participate in all these different investment options across the life cycle of a startup. The investments can be further be divided into two categories:
Steps to follow include:
a. You need to contact your investment/financial advisor in order to invest through the indirect option. He/she will research and give you a list and profiles of all the different funds looking to raise money at the time.
b. Go through the different options available and make a decision on factors like:
c. You can now set up a call with the fund representative to clear any queries you may have and also take it forward. Generally there will be some paperwork involved before you can actually give your money to the fund.
There are a hundred things that could be listed down to keep in mind before investing in a startup, however here are the main ones that should be on your checklist no matter what-:
Any individual whether Indian, foreign or NRI is allowed to invest in a VC/debt/private equity fund provided you have the minimum amount of funds available to invest in these instruments.
The minimum amount is INR 1 crore for an individual investing in any of the above instruments.
An angel investment on the other hand does not have any minimum investment and thus purely based on your direct agreement with the startup that you are interested to invest in.
The startup ecosystem in India is at an exciting phase right now with deals and activities happening at an unprecedented rate. This provides a great opportunity to a lot of retail investors to invest and reap the returns of the great Indian startup story. However, it is important that you exercise caution like any other investment and understand your investment properly before going ahead with it.
Ishpreet Gandhi is the founder and managing partner at Stride Ventures. Prior to founding Stride Ventures, Ishpreet Gandhi has worked with Standard Chartered Bank, Citibank, Kotak Mahindra Bank and YES Bank.
Aashika is the India Editor for Forbes Advisor. Her 15-year business and finance journalism stint has led her to report, write, edit and lead teams covering public investing, private investing and personal investing both in India and overseas. She has previously worked at CNBC-TV18, Thomson Reuters, The Economic Times and Entrepreneur.
Published: Dec 31, 2021, 9:00am